Understanding The Bitcoin Era

With all the fracas going on in the past few weeks, it’s likely you’ve at least heard a passing mention of the Bitcoin phenomenon. When Bitcoin futures went live, the investment world went abuzz, and with the price of Bitcoin rising dramatically in the past few months, general interest in the Bitcoin has crept ever-higher. With that in mind, we’d like to dive into some basics, history, and other pertinent details for those who might want to bolster their Bitcoin knowledge and educate themselves on what is currently the world’s most well-known cryptocurrency.

The Basics

Much of the most elementary information about Bitcoin can be found directly from the Bitcoin.org FAQ. While we won’t rehash every bit of information here, we would like to dive into some of the more important points and explore them with slightly greater detail. For instance, What it is and how it works. Here’s a short explanation, taken directly from the Bitcoin.org FAQ:

“Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.”

While succinct, that answer still leaves a bit to be desired by those completely unfamiliar with the concept. To cut through some of the confusion, you’ll first have to get an idea of the technology behind it, a network commonly referred to as a blockchain:

“Blockchain…is basically an online ledger that keeps a secure record of each transaction all in one place. Every time anyone buys or sells bitcoin, the swap gets logged. Several hundred of these back-and-forths make up a block.”

The advantage here is that these blocks are decentralized across all the devices that have Bitcoin wallets, which, in theory, makes it quicker, cheaper, and more reliable as a form of payment. Coindesk breaks the concept down with an easy to understand analogy, highlighting the fact that the decentralized ledger keeps the system honest:

“You can’t cheat it. I can’t send you digital apples [Bitcoin] I don’t have, because then it wouldn’t sync up with everybody else in the system. It’d be a tough system to beat. Especially if it got really big. Plus, it’s not controlled by one person, so I know there’s no one that can just decide to give himself more digital apples. The rules of the system were already defined at the beginning.”

Another one of those founding rules of the Bitcoin system is that there’s a finite amount: 21 million. As the years roll on, the number of Bitcoin released drops (it cuts in half every four years), and those “mining” Bitcoin receive a diminished reward for doing so. Because of this, the number of discoverable Bitcoin (and total Bitcoin in circulation) will eventually cease growing. This helps guard Bitcoin against inflation, but also raises the question, how do people access gain access to those new Bitcoin in the first place?

The process is known as Bitcoin Mining. There’s some complex math that goes on behind the scenes, but Mother Jones provides a comprehensible, if simplified, explanation, by way of financial attorney Reuben Grinberg:

“Grinberg compares it to finding the missing piece of a puzzle. Whomever finds the puzzle piece wins a certain number of Bitcoins, and the process starts all over again. Finding the Bitcoin solution involves an incredible amount of processing power, and so users often band together in “pools” in order to find the solution and to earn Bitcoins more regularly.”

This system, which incorporates blockchain, prevent individuals from scamming by way of attempting to modify blocks, since that would invalidate subsequent blocks. It also creates a “competitive lottery that prevents any individual from easily adding new blocks consecutively in the blockchain.” In short, individuals have to play by the rules of the system, else they’re unable to mine any Bitcoin at all.

As for transactions of Bitcoin between different Bitcoin wallet holders, these are all included in the blockchain as well. Each Bitcoin wallet has a “secret” piece of data, referred to as a private key, that enable wallet holders to spend their Bitcoin through a cryptographic signature. They provide a kind of “mathematical proof” of a transaction, adding the wallet holder’s signature to an exchange and preventing others from altering said exchanges once the signature has been issued.

How Bitcoin Is Used

Despite being a relatively new technology, Bitcoin has rapidly gained popularity along with utility. Across the world, individuals are using Bitcoin to pay for goods and services, a process which is being made even easier by the increasing level of acceptance of Bitcoin and new services designed to help facilitate its use.

Part of the reasoning behind the rise of Bitcoin are the multiple benefits provided by its use, which, according to Bitcoin.org, include payment freedom, the ability to choose fees, greater security and control, transparency, and a reduced level of risk for merchants. Users can, for instance, send and receive Bitcoin virtually anywhere at any time. They aren’t subject to additional charges levied by other methods of payment, etc.

Because of its decentralized nature and the great deal of freedom it allows users, Bitcoin is oft-scrutinized for its potential to enable illicit activity. Supporters often counter these claims by noting that any form of currency can be used for unscrupulous dealings, and that existing forms of transactions outstrip Bitcoin in their use for criminal purposes. Beyond that, though, they add that Bitcoin has the potential to limit some forms of crime (like fraud) since it is impossible to counterfeit.

Bitcoin’s History

How did Bitcoin get its start? You can learn a fair bit about its history from Forbes run-down and this infographic from Futurism. Here are some essentials, though:

Launched in 2009, some of the specifics surrounding Bitcoin’s origins are shrouded in an element of mystery. After the Bitcoin.org domain was registered, a paper, Bitcoin: A-Peer-To-Peer Electronic Cash System was posted detailing the the system and how it was supposed to work.

The originator, “Satoshi Nakamoto,” is believed to be a pseudonym, and the true identity of Bitcoin’s creator is unknown. Multiple attempts to reveal this identity have been made, with the most recent pointing to Australian scholar Craig Steven Wright, but, so far, none of the investigations into Nakamoto’s identity have been conclusive. It could be an individual, or a group, but, regardless they were the first to mine bitcoin — the progenitor who gave it that initial spark.

The first Bitcoin transaction occurred in 2009, between Nakamoto and a programmer, Hal Finney. Services to exchange Bitcoin for other currency (like the infamous MtGox) were established.

2010 saw the first valuation of Bitcoin, when an individual paid 10,000 Bitcoin for two pizzas. As Forbes noted, “If the buyer had hung onto those Bitcoins, at today’s prices they would be worth more than $100 million.”

2013 saw a crash in Bitcoin prices, and 2014 brought a wave of scams and theft. In spite of these setbacks, though, Bitcoin usage continued grow, and those prices eventually skyrocketed to their current 2017 peak of $17,000.

In the years since its release, Bitcoin has experienced increasing growth and notoriety. Of the many milestones throughout the Bitcoin saga, however, two of the more recent developments stand out: The Bitcoin Fork and Bitcoin Futures.

The Bitcoin Fork occurred in late 2017, with the creation of Bitcoin Cash. Essentially, it created a shift in the blockchain rules. While not supplanting the old mining rules that govern Bitcoin, it did create an alternate form of the currency. They have the same “cryptographic credentials,” but, as Ars Technica notes, “very different values if you sell them for old-fashioned dollars.”

The reasoning behind the split arose over the size over the block limits when mining for Bitcoin. Instead of debating in circles, a group of Bitcoin users, the so-called “Big block supporters,” decided to take matters into their own hands and create the rival version of Bitcoin:

“So those miners in Bitcoin Cash from the summer decided that blocks should be much bigger, that every miner should be moving bigger blocks of memory.”

As for Bitcoin Futures, they’ll work like many similar such financial products, allowing investors to bet on the future price of Bitcoin and settle in cash for potential profit. This could, theoretically, “pave the way for an exchange-traded fund,” allowing for more investments in Bitcoin, reducing its volatility, and opening the door for greater participation in Bitcoin trading by Wall Street.

What’s next? 2018 is shaping up to be The Year Of The Cryptocurrency Craze, according to sources like Wired. As the Bitcoin becomes more widespread, competition among Bitcoin services will likely increase, either working out the kinks or falling by the wayside. Even if Bitcoin eventually crashes and burns, though, it seems likely that the idea of cryptocurrency is around to stay, and another challenger might rise to fill the void.